The Office of General Counsel issued the following opinion on May 2, 2008 representing the position of the New York State Insurance Department.

RE: Director and Officer Liability Insurance

Questions Presented:

1. Do the retention and co-insurance limits set forth in Regulation 110 (11 NYCRR § 72) pursuant to N.Y. Bus. Corp. Law (BCL) § 726(a)(3) apply to a D&O policy issued to a New York domiciled insurer?

2. Are foreign corporations that are exempted by BCL § 1320 from the requirements of BCL § 726 subject to the retention and coinsurance limits set forth by Regulation 110?

3. Is a foreign corporation that is exempt under BCL § 1320 from BCL § 726 required to include retention and coinsurance in the amounts set forth by Regulation 110 in D&O policies issued pursuant to BCL § 726(a)(3), when such D&O policies include D&O coverage for a subsidiary that is a domestic insurer?

Conclusions:

1. Yes. All domestic corporations, including insurance corporations, that have D&O policies issued to the corporation for the benefit of the directors and officers pursuant to Business Corporation Law (BCL) § 726(a)(3) are subject to the retention and coinsurance limits set forth in Regulation 110.

2. No. BCL § 1320 exempts certain foreign corporations from the provisions of BCL § 726. If BCL § 726 does not apply, then neither do the limits set forth in Regulation 110.

3. Yes. A domestic subsidiary that is subject to BCL § 726 is also required to follow the retention and coinsurance limits set forth in Regulation 110 for any D&O policy that provides coverage for the domestic subsidiary.

Facts:

This inquiry was general in nature, without reference to specific facts.

Analysis:

As an initial matter, we note that although insurers are not formed pursuant to the BCL,1 the provisions of the BCL, when not inconsistent with the Insurance Law, apply to most insurance corporations. See N.Y. Ins. Law § 108.

In addition, the queries ask whether Regulation 110 “imposes requirements” in certain cases, but strictly speaking, that Regulation does not impose requirements as much as set forth minimum coinsurance and retention amounts, as required by the applicable statutes.

Question 1

BCL § 7262 is pertinent to the inquiry. That statute sets forth the permissible categories of insurance that business corporations in New York may purchase to indemnify directors and officers. BCL § 726(a) reads as follows:

(a) Subject to paragraph (b), a corporation shall have power to purchase and maintain insurance:

(1) To indemnify the corporation for any obligation which it incurs as a result of the indemnification of directors and officers under the provisions of this article, and

(2) To indemnify directors and officers in instances in which they may be indemnified by the corporation under the provisions of this article, and

(3) To indemnify directors and officers in instances in which they may not otherwise be indemnified by the corporation under the provisions of this article provided the contract of insurance covering such directors and officers provides, in a manner acceptable to the superintendent of insurance, for a retention amount and for co-insurance.

(a) Section 727(a)(3) of the Business Corporation Law (B.C.L.), section 727(a)(3) of the Not-for-Profit Corporation Law (N-PCL) and section 7024(a)(3) of the Banking Law (B.L.) give a corporation the power to obtain insurance for the purpose of indemnifying its directors and officers in instances in which they may not otherwise be indemnified by the corporation under the provisions of B.C.L. article 7, N-PCL article 7 and B.L. title 7, provided that the contract of insurance indemnifying such corporate directors and officers, or "D&O indemnification policy." includes a retention amount (or deductible) and coinsurance, in a manner acceptable to the Superintendent of Insurance.

11 NYCRR § 72.1(c) identifies the corporate entities that are subject to the retention and coinsurance limits of Regulation 110:

(c) Retention amounts and coinsurance are both required, in accordance with this Part, for D&O indemnification policies issued to corporations formed under the Insurance Law, Religious Corporations Law, Cooperative Corporations Law, Transportation Corporations Law, or any other law of this State, where provisions of such laws make such corporations subject to B.C.L. section 727 or N-PCL section 727.

Regulation 110, therefore, applies to all domestic corporations that are subject to BCL § 726. Nevertheless, the retention and coinsurance limits set forth in Regulation 110 are not applicable to all D&O policies. For example, no retention or coinsurance is required where the director or officer to be covered may be properly indemnified by the corporation under applicable law, or where the D&O policy is issued to the corporation itself or directly to the director or officer. See 11 NYCRR § 72.1(b).

Question 2

In addition to the retention and coinsurance exemptions set forth in section 11 NYCRR 72.1(b), 11 NYCRR § 72.1(d) provides an exemption for foreign corporations. As stated in 11 NYCRR § 72.1(d), foreign corporations that are exempted from various BCL provisions by BCL § 13203 are also exempt from the retention and coinsurance limits set forth in Regulation 110. 11 NYCRR § 72.1(d) reads as follows:

(d) A D&O indemnification policy issued to a foreign corporation, if exempt under B.C.L. section 1320 or N-PCL section 1321, need not provide for a retention amount or coinsurance.

Therefore, if a foreign corporation is exempted under BCL § 1320, then the retention and coinsurance limits of Regulation 110 are inapplicable. Exemption under BCL § 1320, however, is not determined by the Insurance Department. Such determinations fall under the purview of the Department of State. Thus, any inquiries about the issue of exemption provided under the BCL should be directed to:

New York State Department of State
Division of Corporations
One Commerce Plaza
99 Washington Avenue
Albany, NY 12231

Question 3

As stated in the response to the first question above, D&O policies issued as permitted under BCL § 726(a)(3) that do not fall under the exemptions enumerated in 11 NYCRR § 72.1(b) are subject to the retention and coinsurance limits of Regulation 110 insofar as such policies provide indemnification to the directors and officers of a domestic corporation. The Regulation 110 requirements for D&O policies that indemnify the directors and officers of a domestic insurer do not turn on the residence of the party that procures the policies.

The retention and coinsurance requirements reflect the policy concerns of New York State, and nothing in BCL §§ 726 or 1320 indicates that the exemption afforded to a foreign corporation applies in cases where the insurance is procured by the foreign corporation not for its own directors or officers, but for its domestic subsidiary’s directors or officers. Rather, the most logical reading of the language of BCL § 726, as well as Regulation 110, is that the insurance procured is with respect only to the procuring corporation’s own directors and officers. See, e.g., 11 NYCRR § 72.1(a) (specifically referring to the various statutes that “give a corporation the power to obtain insurance for the purpose of indemnifying its directors and officers”) (emphasis supplied). To interpret the governing legal framework otherwise would provide a simple means of evading the requirements applicable to domestic entities in that a foreign parent could be configured to purchase insurance on its domestic subsidiary’s behalf.

For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.

1 Insurance companies are organized and licensed pursuant to Article 12 of the New York Insurance Law.

2 BCL § 727 was renumbered to BCL § 726 by Chapter 513 of the Laws of 1986 § 1. That renumbering is not reflected in Regulation 110.

3 BCL § 1320 provides, in pertinent part, as follows:

Notwithstanding any other provisions of this Chapter, a foreign corporation doing business in this state which is authorized under this article, its directors, officers and shareholders, shall be exempt from the provisions of … section 1319 (Applicability of other provisions) if when such provision will otherwise apply:

(1) Shares of such corporation were listed on a national securities exchange, or
(2) Less than on-half of the total of its business income for the preceding three fiscal years, or such portion thereof as the foreign corporation was in existence, was allocable to this state for franchise tax purposes under the tax law.